Creditor says Deis acted in bad faith

Accused of self-interest in continuing with CalPERS

STOCKTON - A creditor seeking to block Stockton's bankruptcy in its most recent arguments takes a shot at City Manager Bob Deis and his executive team, accusing them of putting their personal interests first.

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By Scott Smith

recordnet.com

By Scott Smith

Posted Dec. 19, 2012 at 12:01 AM

By Scott Smith
Posted Dec. 19, 2012 at 12:01 AM

» Social News

STOCKTON - A creditor seeking to block Stockton's bankruptcy in its most recent arguments takes a shot at City Manager Bob Deis and his executive team, accusing them of putting their personal interests first.

National Public Finance Guarantee Corp. argues that Deis opted not to take on the California Public Employees' Retirement System because he and his executive team are members of the retirement fund and would stand to lose personally.

The city has yet to respond formally in advance of a courtroom hearing scheduled for Feb. 26. Deis said in an interview Tuesday that the creditor is posing a classic "throw-the-stuff-on-the-wall-to-see-if-it-sticks" argument.

In more than seven hours of depositions, Deis said attorneys for the creditors never asked how his pension would be affected. It is immaterial, said Deis, adding that of much larger consequence to him and his wife is the city's retiree health care contribution, which Deis phased out.

"What did I recommend we do with that mess?" said Deis, critical of the creditor's argument spelled out in a 20-page document. "The brief never speaks to that."

National Public Finance and Assured Guaranty Corp. both met Friday's deadline challenging Stockton's bankruptcy. Wells Fargo Bank and Franklin High Yield Tax-Free Income Fund joined their arguments.

Collectively, creditors have issued $700 million worth of bonds to Stockton.

The city filed Chapter 9 on June 28, but U.S. Bankruptcy Judge Christopher Klein has yet to approve it, which would give the city a green light to write its exit plan, asking creditors to take a loss on their investments.

Both Assured and National Public Finance contend that Stockton failed to negotiate in good faith and isn't therefore eligible to restructure its finances under Chapter 9 because the city didn't engage CalPERS in negotiations.

CalPERS is the city's single largest creditor with an estimated liability at $245 million over the next decade.

In court papers National Public Finance's attorneys say that in advance of filing bankruptcy Deis led a so-called Strategic Directions Team to formulate the city's plan to deal with its stakeholders. The group included Stockton's outside attorneys and consultants.

Also on the team were: Deputy City Managers Laurie Montes and Mike Locke; Economic Development Director Wendy Saunders; Human Resources Director Teresia Haase; and Connie Cochran, the city's spokeswoman. These city employees are enrolled in CalPERS.

The team's choice to bypass CalPERS is an example a decision "tainted by self-interest," attorneys Lawrence Larose and Matthew Walsh, who represent the creditor, say in court papers.

"The city's desire for a 'Burger King-style' bankruptcy - the city wants to have everything its own way - does not meet the good faith requirement," the attorneys say.

They also argue that three elected officials - Councilmembers Elbert Holman, Dale Fritchen and Mayor Ann Johnston - were CalPERS members, further clouding the city's judgment.

Deis countered that the creditor is arguing disingenuously because the city mistakenly signed up those officials for CalPERS benefits, and they withdrew their membership this year upon learning of the error.

Deis in his Nov. 28 deposition said that he opted not to reject its CalPERS contract because that would ultimately hurt the city's employees and retirees, who had already given up enough. Upsetting their pensions would make it hard for Stockton to maintain and recruit employees, Deis said.

National Public Finance makes a compelling argument, said Philadelphia bankruptcy attorney Michael Viscount of the Fox Rothschild law firm, who commented on the case as an outsider.

Viscount said he would use that conflict argument if he were on the front line of Stockton's Chapter 9 case representing a creditor.

He said that San Bernardino in its bankruptcy is withholding CalPERS payments, and the pension fund lashed out, calling the Chapter 9 filing a "sham" for not treating its capital market creditors the same way.

Viscount sees all creditors in both Stockton and San Bernardino's cases positioning themselves at this early stage in each bankruptcy, which won't likely end happily for anybody.

"They're going to fight back until there's a deal that nobody likes," he said. "Nobody should ever walk away and feel that it was a good deal for them."

Dwane Milnes, a former Stockton city manager and adversary of Deis as a retired city employee, stopped short of defending Deis. But Milnes said that aside from the current city manager, there is nobody else as knowledgeable of the finances to advocate for Stockton.

The City Council hires administrators, such as the city manager, who they entrust with negotiating on behalf of the city overall. They're expected to carry out that duty with integrity, Milnes said.

"You can make a conflict argument with regards to almost anybody on the city side," Milnes said. "You try to elect and hire people who ... put their personal interests aside."